Copyright © 2013 The Brattle Group, Inc. Quantile Regression for Peak Demand Forecasting National Association of Regulatory Utility Commissioners Charles Gibbons, Ph. D. Ahmad Faruqui, Ph. D. September 16, 2014 PRESENTED BY PRESENTED TO

| brattle.com1 Approaches to forecasting peak demand Our empirical approach Ordinary Least Squares (OLS) versus Quantile Regression (QR) Results Outline

| brattle.com2 In this presentation, we discuss methodologies for forecasting peak demand. We argue that any forecasting methodology should be evaluated by its accuracy. An accurate model should be unbiased, i.e., just as likely to over-forecast as to under-forecast peak demand in a given year. It should also have the smallest forecasting error, in-sample and out-of-sample. Forecasting peak demand

| brattle.com3 Forecasting in the post-recession has become quite problematic not just for sales, but also peaks. Annual peak demand is anomalous and the forecasting methodology must take this into account. OLS dominates the forecasting landscape, largely because of familiarity. But it is best suited to forecasting average consumption, not peak demand Motivation for the study

| brattle.com4 In practice, OLS has been estimated in many different ways. The most popular specifications are listed below: ▀ OLS with one data point for each annual peak day. This yields relatively few observations and gives imprecise parameter estimates unless one goes back several years, which itself is problem-prone, as structural change is likely to have occurred in the model parameters. ▀ OLS on a subset of relatively extreme days, but the definition of extreme remains arbitrary. We propose Optimal Forecast Quantile Regression (OFQR) as an alternative solution to OLS. Motivation (continued)

| brattle.com5 In order to compare OFQR and OLS methods, we analyzed the data from an Asian utility. The results showed that OFQR was better than OLS. To confirm this result, we reached out to several US utilities and ISOs/RTOs and were successful in obtaining data from 32 “zones” that are different in size and located in different geographies. We developed a representative model specification for forecasting peak demand and estimated it for all 32 zones. ▀ This “meta analysis” allows us to compare the forecasting performance of OLS with OFQR. Motivation (concluded)

| brattle.com6 We model ▀ Daily maximum hourly demand using all summer (May-September) days Using ▀ Monthly energy ▀ Maximum daily temperature (contemporaneous and lag) ▀ Minimum daily temperature (contemporaneous and lag) ▀ Month fixed effects ▀ Day of week fixed effects ▀ Dummy variable for weekday holiday ▀ Quarterly index of economic activity* ▀ Daily humidity* ▀ Monthly CDD and HDD* * when available Data (1999—2013)

| brattle.com7 Daily maximum demand is predicted separately by zone and the same functional form is used for all zones. We estimate OFQR and OLS using data from (the “in sample” or “estimation” period). We evaluate the methods using the data (the “out of sample” period). Approach

| brattle.com8 We can decompose maximum demand into two parts: ▀ Predictable demand We can use weather, sales, and other variables to predict maximum demand. ▀ Unpredictable shock There are idiosyncratic components of demand that are not predictable. Decomposing maximum demand

| brattle.com9 The day establishing peak demand likely has large values for both of these components. ▀ Many days in the summer exhibit severe weather; the one with the highest demand will be the one with the highest demand shock. ▀ OLS can be used to create forecasts for days with large predictable demand. ▀ OLS cannot be used to create forecasts for days with large shocks. ▀ QR can be used to create forecasts for days with both large predictable demand and large shocks. An accurate peak demand model must incorporate both components. OLS versus QR

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| brattle.com11 OLS ▀ For a given level of the predictors, what is the average level of demand that is to be expected? ▀ This model incorporates a shock of size 0 (the average). QR ▀ QR requires specifying a percentile of interest; 90%, say. ▀ For a given level of the predictors, what is the 90th percentile of demand that is to be expected? ▀ This model incorporates a 90th percentile shock. The questions that OLS and QR answer

| brattle.com12 The quantile is estimated to provide accurate in-sample predictions of peak demand. This is the “optimal forecast” part of OFQR. The further the estimated quantile is from 50, the greater the difference between the OFQR and OLS models. Quantiles

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| brattle.com14 For each year and each zone, we compare: ▀ Highest level of hourly demand predicted by the model ▀ Highest level of hourly demand actually witnessed (non-coincident) We provide errors for two sets of predictions: ▀ In sample prediction ▀ Oracle forecasts These out-of-sample forecasts use the true values of the predictors. Evaluation

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| brattle.com19 Across zones, OFQR: ▀ Has a mean out-of-sample prediction error of 0.05% compared to -4.82% for OLS ▀ Has a mean out-of-sample absolute prediction error of 3.05% compared to 5.28% for OLS, a reduction of 42% By zone, OFQR: ▀ Has a negative MPE for 15 of 32 zones, while OLS has a negative MPE for 30 of 32 zones ▀ Has a smaller MAPE than OLS for 24 out of 32 zones ▀ Has a median MAPE that is 25% smaller than that for OLS Performance summary

| brattle.com20 Forecast intervals We also develop a bootstrapping method to produce forecast intervals for peak demand. 95% interval coverage In sample95.1 Oracle88.1

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| brattle.com22 Peak demand is a function of predictable demand and unpredictable shocks. ▀ OLS only considers the predictable component of demand. ▀ Shocks are larger on annual peak days compared to non-peak days. ▀ OFQR incorporates the size of the shock term in addition to the predictable component. We see that ▀ The OLS model generally under-predicts peak demand. ▀ The OFQR model generally provides an accurate estimate of peak demand. These results generally hold across utilities. Summary of results

| brattle.com23 Presenter information CHARLIE GIBBONS Associate│ San Francisco, CA Dr. Charles Gibbons is an associate with The Brattle Group who specializes in applying sophisticated econometric and statistical models to legal, regulatory, and policy issues. He has produced analysis for a variety of litigation matters, including models of mortgage delinquencies, forensic analysis of product defects, and local impacts of environmental damages. His work has been used for class certification, liability determination, and damage calculations. He has also developed models for forecasting electricity sales and peak demand for an international utility. Additionally, Dr. Gibbons is a lecturer at the University of California, Berkeley and last taught a graduate-level course in probability and statistics. He received a Ph.D. in economics and an M.A. in statistics from the University of California, Berkeley. His dissertation proposed new methods in applied econometrics and a theory of competition for online advertising platforms. The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc.

| brattle.com24 Presenter information AHMAD FARUQUI Principal│ San Francisco, CA Dr. Ahmad Faruqui has advised utilities, ISOs/RTOs and government agencies on the design and evaluation of demand forecasting models since the inception of his career at the California Energy Commission. At the Electric Power Research Institute, he directed the research program on end-use analysis and forecasting which pioneered the use of a variety of new forecasting models that are still in widespread use in the electricity utility industry. He has consulted with more than 50 utilities and transmission system operators around the globe and testified or appeared before a dozen state and provincial commissions and legislative bodies in the United States and Canada. He has developed models for forecasting monthly and hourly loads for clients using a variety of econometric and time series methods. He helped develop an hourly load forecasting model to assist a competitive wholesaler in bidding for default service. For a utility, he diagnosed why energy sales were below forecasts even after adjusting for the effects of the economy. He assisted a transmission system operator understand why peak demand was being under-forecast by a large amount. And he assisted a regulated provider of steam analyze the customer’s decision to switch from purchasing steam to self-generating of steam and also to analyze the response of steam usage to rising steam prices. The analysis was carried out on a customer-by-customer basis and involved the use of discrete choice methods and conventional regression analysis. He holds a doctorate in economics from the University of California at Davis and undergraduate and graduate degrees from the University of Karachi, Pakistan. The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc.

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